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Enron's losing partnership
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October 19, 2001: 7:25 a.m. ET
Chief operating officer's group said to profit from company's transactions.
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NEW YORK (CNNmoney) - A limited partnership organized by Enron's chief operating officer, Andrew Fastow, generated millions in profits from transactions that ended up reducing the energy trading company's equity by $1.2 billion, according to a published report Friday.
The partnership, LJM2 Co-Investment LP, realized $7 million last year in management fees and $4 million in capital increases on a principal investment of $3 million, according to the Wall Street Journal, citing an internal partnership document.
News that LJM2 reaped profit from Enron will undoubtedly raise the ire of many investors after the Journal disclosed the company recorded a $35 million third-quarter writedown associated with its partnership with LJM2.
Enron said its relationship with the partnership was designed to hedge against certain investments in broadband telecommunications and other technology sectors, the paper reported.
LJM2 purchased 55 million shares from Enron two years ago in exchange for a note. When Enron's stock and the value of the investments dropped sharply in the following year, the Houston-based company repurchased the shares at a lower price and cancelled the note, resulting in the charge, according to the Journal.
The repurchase of the 55 million shares subsequently reduced Enron's shareholder equity by $1.2 billion, and the company's long-term debt is facing review by Moody's Investor Service Inc. due to "significant writedowns and charges reflecting substantially reduced valuations," the paper reported.
Fastow ended his relationship with LJM2 in July, but it puts him in the precarious position of having benefited from Enron's writedown. Other investors in LJM2 include Wachovia Corp., General Electric Capital Corp., and Credit Suisse First Boston, according to the Journal. 
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